Is It Time For An ARM Product?

In today’s challenging market, lender’s need to retool their fixed rate and arm product offering to meet the demands of today’s prospective homeowner.   This will include development of educational materials for homeowners to overcome the negative perception that has existed regarding ARMS, the result of the 2008 financial crisis.  Think about this … today’s new homeowners, were not yet teenagers during that time.  Is this borrower base learning by historical chatter, or actual facts?

Additionally, it is a perfect time for Banks and Credit Unions to look at their investment profile for portfolio loans and address if an arm that has unique features can be developed.   I talk about this as a concept, as I truly believe the financing market needs to change by being nimble, creative and yet mitigate risk by putting various controls in place.

As a precursor to this concept temporary buydowns are already accepted in the market.  Loans originated with a temporary buydown feature can be issued in a Mortgage-Backed Security and offer the borrower a lower initial interest rate and monthly payment.   Let’s face it, the concept of a temporary buy-down has been more in vogue of recent in the higher rate market, providing for a borrower financing under a 30-year fixed mortgage with lower interest rates in the first 1 – 3 years of the loan.   Can a similar concept be developed for hybrid arms?

Concept:   I challenge the industry to think about the viability of offering funds, held in escrow on a hybrid arm.   In today’s market some lenders (typically banks and credit unions) are offering a 5/1 arm at rates as low as 5.50%.   This could be a reduction in rate of .75% over that of financing on a 30-year fixed rate basis at a rate of 6.25%.  The monthly cost savings equals $215, which over 5 years is nearly $13,000. 

What if an account was established (existing concept for a temporary buy-down) where funds could be used for the arm payment adjustments?  This could be viewed as a seller-concession, or financing assistance.   The financing assistance concept is no different than when the GSE’s and HUD allow Housing and Finance Agencies to offer Down Payment Assistance.  Down Payment Assistance can come from varied sources, can be tied to an interest bearing second mortgage, and in some cases grants that are forgiven at a future date.

Only when the loan reaches a payment change due to the arm adjustment amount are funds then released from the account to make up the difference in the monthly mortgage payment.   AND, if the loan prepays before an arm adjustment occurs, then the funds are credited against the pay-off balance. 

This idea came to mind due to the number of lenders who, in today’s market are using the already accepted temporary buydown feature, as well as the ongoing loan programs offered by HFA’s where the DPA amount (typically 3%, less a small amount of cash from the borrower) is funded by the HFA or other sources.    

If a loan program like this can be created, everyone wins:

• The borrower has a lower monthly payment
• The borrower is financing in a hybrid arm where the payment is fixed for 5 years or longer.
• Funds needed to keep the borrower’s monthly payment the same or with a slight increase are kept in a separate account by the Servicer for credit to the monthly payment when and if the payment adjusts.
• Underwriting criteria could change as payment shock due to a projected arm adjustment would be extended for a specified time period.  Does the 5/1 arm, really become a 7/1 arm, depending on the math?
• Prepayment speeds could improve as the borrower may keep the original loan longer and not refinance.
• Provides for borrower confidence – lower rate, mitigated payment shock

The THINK TANK for new programs has always been in existence – though maybe, just maybe the market has forgotten about what it can have within its control.  

BlackFin offers insights on Capital Markets, Investor Options, GSE and Ginnie Mae benefits, Loan Program Analysis and MSR strategies.   This is just one of the areas we offer expertise in.   Reach out to discuss what items are “on you list” to explore in 2026!